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Sunday, June 26, 2011

Greece today and Argentina a decade ago

In the end, Argentina may have one more lesson to teach Greece: the danger of fatalism. “A lot of people were saying that Argentina would never recover, that the peso would never regain value, that this country was damned,” said Mr. Kerner, the analyst. “And it didn’t happen.”

There are several similarities between Greece and Argentina: both countries have a history of more or less chaotic conditions in politics/administration/economy (Argentina's is much longer!); both societies have had their value structures turned upside-down where the "incorrect ones" are the winners and the "correct ones" are the losers; both societies have elites which are incredibly wealthy but whose wealth is mostly outside the country; and Greece today is where Argentina was a decade ago.

Two of the most important differences: first, Argentina is an extremely wealthy country in terms of natural ressources (Argentine quote: "God replenishes over night what Argentines destroy during the day"); because of that, Argentina is a large exporter and achieves a significant trade surplus; but the most important difference is, secondly, that Argentina a decade ago could devalue and, thereby, get its economy going again quite rapidly. Greece today cannot devalue and even if she could, her economy would not get going again so rapidly because there is little substance in it (80% services). If Argentina had not devalued, the above mentioned fatalism would have become reality. If Greece does not find a similar solution rapidly, fatalism will become reality beyond doubt.

Greece cannot devalue as long as she holds on to the Euro. If Greece were to leave the Euro, outright default on her foreign debt would be the immediate consequence, a situation from which Argentina - despite all her progress - still suffers today.

Conclusion: Greece must rapidly find a way how she can achieve the economic effects of a devaluation (making imports more expensive and exports more competitive) without having to leave the Euro. Imports can be made more expensive simply by imposing special taxes on them (ranging all the way up to 100% on luxury goods). Such a law could be passed within days.

Exports could be made more competitive by subsidizing them. That would be futile. First, the money for such subsidies is lacking and, secondly, the export industry per se would not increase efficiency/productivity. Instead, Greece has to allow absolutely internationally competitive conditions in selected Free Trade Zones (low labor costs; tax incentives; etc.). This is where new manufacturing would have to be built up.

Finally, Greece has to find a way where capital flight abroad is stopped and where, instead, foreign capital of wealthy Greeks returns to the country for investment in manufacturing. Regarding the former, a new law restricting capital transfers abroad could be passed within days and regarding the latter, a new constitutional Foreign Investment Law would have to be passed and the EU should guarantee compliance with it.

The fact that Greece would have to additionally get her household in order (reigning-in government expenditure; hammering-down on tax evasion; etc.) is so obvious that it does not require special mentioning.

All of this new legislation has in common that it violates EU-treaties. Note, however, that treaties can be amended (if only temporarily). If the EU were not willing to temporarily amend treaties so that Greece has a realistic chance for a better future, then Greece might as well leave the EU.

An Economic Development Plan would give foreign creditors more confidence that they are financing a better future for Greece instead of throwing good money after bad. That should entice foreign creditors to be willing to voluntarily reschedule Greece's debt maturities in such a way that Greece has "air to breathe" for a number of years (but no haircut!).

Churchill coined the phrase "Who should do it but us? When should we do it but now?" Well, Greeks, go ahead and do it!